In Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) [2014] FCA 1308 Justice Murphy of the Federal Court of Australia has determined the penalties imposed on the five former directors of APCHL for breaching their duties owed to members of Prime Trust by approving amendments to the Trust’s Constitution as well as the prohibition on involvement in related party transactions which permitted a $33 million fee to director Mr Lewski. (Background)
Justice Murphy made the following orders:
(a) Mr Lewski be disqualified from managing a corporation for 15 years and pay a pecuniary penalty of $230,000;
(b) Mr Butler be disqualified from managing a corporation for four years and pay a pecuniary penalty of $20,000;
(c) Mr Jaques be disqualified from managing a corporation for four years and pay a pecuniary penalty of $20,000;
(d) Dr Wooldridge be disqualified from managing a corporation for two years and three months and pay a pecuniary penalty of $20,000; and
(e) Mr Clarke pay a pecuniary penalty of $20,000. (The relevant Board meeting was Mr Clarke’s first.)
The Court also ordered that the defendant directors pay the costs of ASIC’s proceeding.
UPDATE 10 February 2015: On 30 January 2015, Justice Middleton ordered that the order of Justice Murphy made on 2 December 2014, that Dr Michael Wooldridge be disqualified for 2 years and 3 months, be stayed until the hearing and determination of the appeal or further order only to the extent necessary to permit Dr Wooldridge to continue as a director of CRC for Mental Health Ltd (ACN 151 016 492). Dr Wooldridge remains disqualified from managing any other corporation for the disqualification period.
ASIC has cross-appealed the disqualification and pecuniary penalty orders made against Mr Lewski, and the pecuniary penalty orders made against Dr Wooldridge, Mr Butler and Mr Jaques.
The Federal Court has indicated that the appeals will be heard sometime in May 2015.
UPDATE July 2016: Appeal allowed.
UPDATE: November 2017. Appeal final orders.
Justice Murphy said:
” The Directors seek to be wholly or partly relieved from liability pursuant to ss 1317S and/or 1318 (“the exoneration provisions”) and they argue that declarations of contravention should not be made. In the event that they are not relieved from liability and declarations are made, they oppose the disqualification orders and pecuniary penalties that ASIC seeks. …
in my view no Director met the test for exoneration. Further, even if a Director had met the test, in my view in all the circumstances no Director should be relieved wholly or partly from liability….
Primarily because of the nature and seriousness of their contraventions and because of the need for personal and general deterrence I consider that each Director, except for Mr Clarke, must be disqualified from managing corporations for a period. I consider that each Director (including Mr Clarke) must suffer pecuniary penalties.
Mr Lewski’s conduct in its context is the most culpable of the Directors by far and I have imposed a long disqualification and a large pecuniary penalty on him. The conduct by each of Dr Wooldridge, Mr Butler and Mr Jaques and its context was broadly similar and I have imposed penalties from a broadly similar starting point but reflecting their different personal circumstances, and much lower than Mr Lewski’s. In the particular circumstances of Mr Clarke’s conduct and its context I have imposed only a pecuniary penalty and I have not disqualified him.
The differences in the penalties turn on matters including the materially different role played by Mr Lewski compared to the other Directors, the different requirement for personal deterrence in respect to Mr Lewski, the different requirement for general deterrence having regard to Mr Lewski’s conduct, the fact that Mr Lewski directly benefitted from the contraventions, the fact that he has retained $33 million that he wrongfully received, and the material difference between Mr Clarke’s conduct and the conduct of the other Directors, as well as the different personal and mitigating circumstances that apply. ..
(Mr Lewski) orchestrated making the Amendments, bringing them into effect, and facilitating payment of the $33 million Listing Fee even though he was the primary beneficiary of that fee, payable from trust property.
In my view Mr Lewski subordinated the Members’ interests to his own at every step. ASIC did not run its case on the basis that any Director’s conduct was dishonest and I make no finding of dishonesty…
The conduct of Dr Wooldridge, Mr Butler, Mr Jaques and Mr Clarke was significantly less blameworthy than Mr Lewski’s and in my view their contraventions were honest, although serious, failures. Shortly put, they failed to properly deal with Mr Lewski’s self-evident conflict of interest regarding the Listing Fee, and rather than acting in the best interests of the Members’ and putting the Members’ interests first, they capitulated to the interests of Mr Lewski. They also failed to comply with the express prohibition in the Constitution against any amendment in favour of or resulting in a benefit to APCHL. Mr Clarke’s conduct was though materially different and less culpable than the other Directors. …
Mr Lewski displayed no contrition and no real understanding of the seriousness of his breaches and I consider that if he is not disqualified there is a risk he will reoffend. The need to protect the public including by deterring him from repeating similar conduct is an important consideration behind his disqualification and its length. Amongst other things, the lengthy disqualification and significant pecuniary penalty attempt to put a price on his contraventions that will show him that the game is not worth the candle.
In my view it is unlikely that Dr Wooldridge, Mr Butler, Mr Jaques or Mr Clarke will reoffend and there is no need to set penalties so as to deter them from similar conduct. I have not done so. “
In relation to Mr Clarke, Justice Murphy said:
“It appears that he sat passively in his first Board meeting and merely waved through a resolution which allowed a $33 million breach of trust. He failed to give any attention whatsoever to the resolution or the facts underpinning it. Such conduct goes beyond mere inadvertence or carelessness and it negated the proper performance of the duties in question. “
Declarations of contravention were also made against APCHL, the first defendant. APCHL did not participate in the proceeding and the only relief sought by ASIC against it was declaratory relief.
A stay of the orders in respect of Mr Lewski and Dr Wooldridge was granted until 23 December 2014.
The defendants have until then to lodge an appeal to the Full Court of the Federal Court.
Dr Wooldridge has already announced his intention to appeal.
